## 1geoea2021001 ## Source details **Canonical URL:** [1geoea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1geoea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1geoea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1geoea2021001.pdf.json) --- ### Executive summary — context and program status - Georgia emerged from its second lockdown imposed in November 2020; vaccinations commenced in March 2021. - Lockdowns drove a contraction of around 6.2 percent of GDP in 2020; a recovery is expected to take hold in the second quarter of 2021. - This is the final review of the EFF arrangement; status: - All end-December quantitative performance criteria and indicative targets have been met. - All but one of the remaining structural benchmarks have been met; the remaining one should be completed by end-April. - Completion of this review will make SDR 78 million (about $111 million) available to Georgia, bringing total disbursements under the EFF arrangement to SDR 484 million (about $687 million). ### Recent economic developments (selected exact figures) - COVID-19 epidemiology and public health: - Daily new cases fell from a peak of over 1,200 per million to 96 as of end-March. - Vaccinations: medical personnel began on March 15th; people over age 65 on March 25th. - Real sector and inflation: - GDP: decline of 6.8 percent (y-o-y) in 2020Q4. - Real GDP contracted by 6.2 percent in 2020; tourism revenues collapsed by 83 percent in 2020. - Headline inflation: 2.4 percent (y-o-y) in December 2020; 3.6 percent (y-o-y) in February 2021. - Core inflation: 5.2 percent (y-o-y) in February 2021. - External sector and exchange rate: - Current account deficit for 2020 estimated at 12.3 percent of GDP. - Tourism revenues declined by 83 percent (y-o-y) in 2020. - Net remittances grew by 28 percent (y-o-y) in 2020. - Financial account surplus in 2020 estimated at 5.5 percent of GDP. - Net FDI deteriorated by 40 percent (y-o-y) in 2020. - Lari depreciated by 5.6 and 7.4 percent (y-o-y) in nominal and real effective terms, respectively, as of end-December 2020. - Lari depreciated by an additional 2.2 percent against the dollar through March 26th, 2021. - Fiscal outcomes and public finances: - Augmented budget deficit reached 9.3 percent of GDP in 2020, below the adjusted program ceiling of 10.1 percent of GDP. - Fiscal support for COVID-19: 3.8 percent of GDP in spending and revenue measures. - Capital spending was 8.6 percent of GDP in 2020. - VAT refunds: 615 million GEL in 2019 to 1,040 million GEL in 2020; automatic VAT refunds implemented in October 2020. - Financial sector: - Credit growth (constant exchange rates): 8.3 percent (y-o-y) as of end-February 2021, down from 18.1 percent in February 2020. - All credit growth due to lari loans; foreign currency loan growth around 1 percent (y-o-y). - System-wide regulatory capital ratios: 17.6 percent as of end-2020 (down from 19.5 percent in 2019). - Non-performing loans (NPLs): broadly unchanged at 2 percent since the COVID-19 outbreak (IMF definition shows some variation elsewhere). - Impaired assets (NBG definition): rose from 4.4 percent in 2020Q1 to 8.2 percent in 2020Q4. - Restructured loans: 18 percent in Q4 2020. - Central bank and reserves: - National Bank of Georgia raised the policy rate by 50 basis points on March 17th, 2021 after earlier cumulative cuts of 100 basis points since the start of the pandemic. - Net international reserves (program exchange rates) by end-December 2020: $1,335 million, $435 million above the adjusted target. - Gross international reserves at end-2020: $3,911 million, $405 million above 2019 level, reflecting $1.3 billion in donor assistance. - NBG sold an additional $160 million in January–March 2021. ### Fiscal policy and the 2021 budget - 2021 budget stance: - Adopted deficit for 2021 envisages GEL 4,082 million (7.6 percent of GDP, end-December 2020 SB). - Budget includes 7.9 percent of GDP in capital spending and 2.3 percent of GDP in targeted and temporary fiscal support to households and businesses. - Budget includes 0.6 percent of GDP in new spending on education reform (0.2 percent on teacher salaries and 0.4 percent on infrastructure). - COVID-19 one-off fiscal measures (Text Table 2 summaries): - Total COVID-19 Fiscal Measures: 1,247 GEL million, 2.3 percent of GDP. - Revenue measures: 270 GEL million, 0.5 percent of GDP (including income tax relief costing 225 GEL million, 0.4 percent of GDP; property tax exemption for tourism costing 45 GEL million, 0.1 percent of GDP). - Expenditure measures: 977 GEL million, 1.8 percent of GDP. - Grants: 85 GEL million, 0.2 percent of GDP (including Credit guarantee scheme 50 GEL million, 0.1 percent of GDP). - Interest rate subsidies on mortgages (below GEL 200,000, issued in 2020): 350 GEL million, 0.1 percent of GDP. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - Policy rate increased by 50 basis points on March 17th, 2021; prior cumulative cuts totaled 100 basis points since start of pandemic and rate was on hold from September 2020 until March 17th, 2021. - Tight stance justified to anchor inflation expectations and address exchange rate pass-through; easing could be reconsidered if inflation pressures remain subdued and expectations anchored. - Exchange rate policy: - Exchange rate flexibility helped cushion the shock; NBG continued FX market interventions in early 2021 to avoid disorderly market conditions. - Financial sector resilience and stance: - Proactive monitoring, prudent provisioning, and maintaining supportive measures on capital requirements until clear recovery should allow banking system to support recovery while avoiding vulnerabilities. - Staff recommended developing markets for distressed assets and automatic write-off/provisioning rules for long-dated NPLs. ### Outlook and risks (baseline and key projections — preserve exact figures) - Growth: - Growth in 2021 projected at 3.5 percent (staff projection). - Medium-term growth expected to recover to 5¼ percent. - Level of real output expected in 2024 is around 11 percent lower compared to the pre-pandemic projection for that year (scarring). - External and reserves: - Staff projects a balance of payments gap of $0.7 billion in 2021. - Current account deficit projected to narrow from 12.3 percent of GDP in 2020 to 10.9 percent of GDP in 2021. - Financial account surplus projected to slightly decrease to 4.4 percent of GDP in 2021. - Tourism revenue in 2021 projected at only 26 percent of its 2019 level. - Reserves projected to be maintained at close to 100 percent of the ARA metric; gross international reserves projected to decline from 111 to 98 percent of the ARA metric in 2021 (mainly due to lower donor support). - External debt expected to decline to 2019 levels by 2026. - Quantitative projections (selected exact series from tables): - Real GDP growth (annual): 2019: 5.0; 2020: -6.2; 2021: 4.3; 2022: 3.5; 2023: 5.8; 2024: 5.5; 2025: 5.2; 2026: 5.2. - CPI, Period average: 2019: 4.9; 2020: 5.2; 2021: 2.5; 2022: 3.8; 2023: 2.7; 2024: 2.7; 2025: 3.0; 2026: 3.0. - Gross international reserves (US$ billions): 2019: 3.5; 2020: 3.6; 2021: 3.9; 2022: 3.4; 2023: 3.6; 2024: 4.0; 2025: 4.2; 2026: 4.5. - General government debt (percent of GDP): 2019: 40.4; 2020: 56.3; 2021: 60.0; 2022: 59.1; 2023: 60.8; 2024: 58.2; 2025: 56.7; 2026: 54.6. - Current account balance (percent of GDP): 2019: -5.1; 2020: -9.8; 2021: -12.3; 2022: -8.5; 2023: -10.9; 2024: -7.9; 2025: -6.5; 2026: -5.9. - Gross external debt (percent of GDP): 2019: 105.6; 2020: 127.0; 2021: 124.8; 2022: 129.0; 2023: 133.9; 2024: 126.2; 2025: 123.1; 2026: 118.0. - Risks to the outlook (Annex II): - Downside: new COVID-19 variants, vaccine procurement difficulties, continued political uncertainty and election-related social unrest, disorderly lari depreciation threatening financial stability given high dollarization and NPL trends. - Upside: successful control of COVID-19 could yield stronger recovery due to pent-up demand and fiscal support. ### Structural reforms and policy recommendations - Priorities to limit scarring and support private-sector-led growth: - Mobilize investment and advance education reform (including teacher qualification framework and teacher career measures). - Fully implement the new insolvency framework and initiate licensing of insolvency professionals. - Develop local capital markets (securities holding, covered bonds) and larization incentives. - Implement judiciary reforms and strengthen SOE governance. - Measures to further improve business environment: enhance transparency and efficiency of the judiciary; strengthen governance and rule of law. ### Program implementation, financing, and staff appraisal - Program issues and financing: - Financing assurances in place for the Eighth Review; adequate financing for remainder of program is assured. - Total external debt service remains elevated; full drawing under program would imply repayments to the IMF at 0.5 percent of GDP or 2.6 percent of GIR in 2026. - Following disbursement for the Eighth Review, stock of outstanding credit will reach 229 percent of quota. - Post-Program Monitoring (PPM) not proposed; authorities interested in a follow-up program within six months. - Staff appraisal — key policy priorities: - Decisive COVID-19 control, secure recovery, maintain macroeconomic policy discipline. - Fiscal policy: begin consolidation to comply with fiscal rule by 2023; prioritize targeted measures and avoid broad tax exemptions or utility subsidies extension; consider reallocating capital spending if additional support needed. - Monetary policy: NBG focused on achieving inflation target; readiness to tighten further if depreciation pressures persist; could ease if inflation pressures subside and expectations anchor. - Financial sector: proactively manage NPL recognition and provisioning; give banks two years to rebuild capital buffers; restrict shareholder distributions until buffers rebuilt; implement bank resolution framework. - Structural reforms: operationalize insolvency framework, advance education reform, deepen capital markets, and pursue connectivity and trade (FTA feasibility with Republic of Korea underway). ### Public Debt Sustainability Assessment (Annex I) — main findings and recommendations - Overall assessment: - Public debt assessed as sustainable; projected to peak close to 61 percent of GDP in 2021 before declining and complying with 60 percent ceiling by 2023. - Public gross debt series (selected exact entries): 33.9 (2019), 40.4 (2020), 60.0 (2021), 60.7 (2022), 58.1 (2023), 56.7 (2024), 54.6 (2025), 52.8 (2026). - Public gross financing needs (percent of GDP): 4.2 (2019), 6.5 (2020), 14.3 (2021), 15.5 (2022), 8.0 (2023), 6.3 (2024), 6.2 (2025), 6.7 (2026). - Drivers of 2020 debt rise: - Widening fiscal deficit, government fiscal relief package (3.8 percent of GDP), accelerated VAT refunds, elevated capital spending, accumulation of government deposits (increase by 3.6 percent of GDP), exchange rate depreciation and contraction. - Vulnerabilities and stress tests: - 80 percent of public debt FX-denominated (high exposure to exchange rate risk). - Debt remains sustainable under standardized stress tests; combined macro-fiscal shock could breach benchmarks but is judged unlikely. - A $500-million sovereign Eurobond maturing on April 12, 2021 is expected to be refinanced; Ministry of Finance has liquidity to bridge re-issuance timing gaps. - Policy implications: - Commence fiscal consolidation in 2021 to comply with fiscal rule while avoiding abrupt consolidation in 2022–23. - Incorporate SOEs into general government reporting and continue SOE governance reforms. - Deepen local capital market and reduce FX-denominated debt share over medium term. ### Risk Assessment Matrix (Annex II) — selected scenarios and prescribed policy responses - Conjunctural shocks (likelihood / expected impact): - Unexpected shifts in the pandemic: Likelihood: Medium; Expected Impact: High. Policy: maintain exchange rate flexibility; use reserves to prevent disorderly depreciation; tighten monetary policy. - Prolonged pandemic: Likelihood: Medium; Expected Impact: High. Policy: extend targeted measures by reprioritizing spending; use monetary space if inflation expectations anchored. - Faster containment: Likelihood: Medium; Expected Impact: High. Policy: maintain prudent macro policies; proceed with fiscal consolidation. - Widespread social discontent and political instability: Likelihood: High; Expected Impact: High. Policy: use reserves to prevent disorderly depreciation; improve policy communication; maintain reform ownership. - Georgia-specific structural risks: - Financial risks from rapid depreciation in a highly dollarized economy: Likelihood: Medium; Expected Impact: High. Policy: maintain tight monetary policy; strengthen resolution framework; adjust macroprudential measures. - Fiscal risks from contingent liabilities (PPAs, SOEs): Likelihood: Medium; Expected Impact: High. Policy: improve SOE governance and fiscal risk management. - Political risks and reform fatigue: Likelihood: High; Expected Impact: Medium. Policy: maintain macro policy discipline; strengthen social safety nets. ### Program technical and monitoring framework (TMU excerpts) - Program assumptions and exchange rates (exact entries): - SDR Special Drawing Rights 0.7439; GEL Georgian lari 2.6468; AUD 0.7227; CAD 0.7419; EUR 1.0556. - Institutional and reporting commitments: - Monthly general government revenues: within two weeks of the end of each month. - Monthly central government expenditures and arrears: within four weeks of the end of each month. - Stock of general government debt by currency and original maturity: within one month from the end of the quarter. - Daily cash balances: as of the end of the previous business day. - Quantitative program targets and continuous performance criteria include ceilings on the augmented cash deficit, net budget lending, a floor on NIR, continuous ceiling on accumulation of external debt arrears, and ceilings on new guarantees and Partnership Fund operations. - Adjustors and specific program tables (selected exact figures for December 31, 2020 cumulative from January 2020): - Healthcare COVID-19 adjustor: 351 (million GEL). - Disbursements of foreign-financed project loans: 1,170 (million GEL). - Receipts from sale of non-financial assets: 150 (million GEL). - VAT refunds: 600 (million GEL). - On-lent amounts from project loan disbursements: 250 (million GEL). - Projected balance of payment support financing (Table 3, US$ millions): Projected privatization revenue: 0.0; Budget support grants: 118.6; Budget support loans: 908.1; Disbursements of project loans and grants: 335.1. - Net International Reserves (definition and outcome): - NIR stock: $1,335 million as of December 31st, 2020 (program exchange rates). - NIR floor adjusts for privatization revenue, budget support grants and loans, Eurobond issuance, and project loan disbursements. *IMF staff report text provided in content unit 1geoea2021001.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and program status - Georgia emerged from its second lockdown imposed in November 2020 following a sharp increase in COVID-19 cases; vaccinations commenced in March 2021. - The lockdowns drove a contraction of around 6.2 percent of GDP in 2020; a recovery is expected to take hold in the second quarter of 2021. - This is the final review of the EFF arrangement, which remains broadly on track: - All end-December quantitative performance criteria and indicative targets have been met. - All but one of the remaining structural benchmarks have been met; the remaining one should be completed by end-April. - Completion of this review will make SDR 78 million (about $111 million) available to Georgia, bringing total disbursements under the EFF arrangement to SDR 484 million (about $687 million). ### Recent economic developments - COVID-19 epidemiology and public health response: - Daily new cases fell from a peak of over 1,200 per million to 96 as of end-March. - Vaccinations of medical personnel began on March 15th and of people over the age of 65 on March 25th. - Real sector and inflation: - Renewed restrictions led to a decline in GDP of 6.8 percent (y-o-y) in the fourth quarter of 2020. - Real GDP contracted by 6.2 percent in 2020, with the decline largely driven by net exports reflecting the collapse of tourism revenues by 83 percent last year. - Headline inflation: 2.4 percent (y-o-y) in December 2020; recovered to 3.6 percent (y-o-y) in February 2021. - Core inflation: 5.2 percent (y-o-y) in February 2021. - External sector and exchange rate: - Current account deficit for 2020 estimated at 12.3 percent of GDP, double the size of the 2019 deficit in dollar terms. - Tourism revenues declined by 83 percent (y-o-y) in 2020. - Net remittances grew by 28 percent (y-o-y) in 2020. - Financial account surplus in 2020 estimated at 5.5 percent of GDP. - Net FDI deteriorated by 40 percent (y-o-y) in 2020. - Lari depreciated by 5.6 and 7.4 percent (y-o-y) in nominal and real effective terms, respectively, as of end-December 2020. - Lari depreciated by an additional 2.2 percent against the dollar through March 26th, 2021. - Fiscal outcomes and public finances: - The augmented budget deficit reached 9.3 percent of GDP in 2020, below the adjusted program ceiling of 10.1 percent of GDP. - Fiscal support provided in response to COVID-19 amounted to 3.8 percent of GDP in spending and revenue measures. - Capital spending was 8.6 percent of GDP in 2020. - VAT refunds increased from 615 million GEL in 2019 to 1,040 million GEL in 2020; automatic VAT refunds implemented in October 2020. - Financial sector: - Credit growth (at constant exchange rates) was 8.3 percent (y-o-y) as of end-February 2021, down from 18.1 percent in February 2020. - All credit growth was due to lari denominated loans; foreign currency loan growth around 1 percent (y-o-y). - System-wide regulatory capital ratios declined to 17.6 percent as of end-2020 from 19.5 percent in 2019. - Non-performing loans (NPLs) broadly unchanged at 2 percent since the COVID-19 outbreak. - Impaired assets (NBG definition) rose from 4.4 percent in 2020Q1 to 8.2 percent in 2020Q4. - Restructured loans reached 18 percent in Q4 2020. - Central bank and reserves: - National Bank of Georgia raised the policy rate by 50 basis points on March 17th, 2021 after earlier cumulative cuts of 100 basis points since the start of the pandemic. - Net international reserves (at program exchange rates) by end-December 2020 were $1,335 million, $435 million above the adjusted target. - Gross international reserves reached $3,911 million at end-2020, $405 million above 2019 level, reflecting $1.3 billion in donor assistance. - The NBG sold an additional $160 million in January-March 2021. - Program implementation: - Inflation remained within the inner bands of the inflation consultation clause (ICC). - All end-December quantitative performance criteria and indicative targets were met. - Authorities met all structural benchmarks except the one on the regulatory framework for insolvency professionals and initiating licensing (end-March 2020 SB); the framework has been issued but licensing expected to start in April 2021. ### Fiscal policy and the 2021 budget - The 2021 budget implies a mildly contractionary fiscal stance while providing targeted support to households and businesses: - Adopted deficit for 2021 envisages GEL 4,082 million (7.6 percent of GDP, end-December 2020 SB). - Budget includes 7.9 percent of GDP in capital spending and 2.3 percent of GDP in targeted and temporary fiscal support to households and businesses. - Budget measures include subsidies for utility costs for households with low consumption and for food producers; financed by reprioritization of spending. - Budget includes 0.6 percent of GDP in new spending on education reform (0.2 percent on teacher salaries and 0.4 percent on infrastructure). - Text Table 2: COVID-19 One-Off Fiscal Measures in 2021 (summaries): - Total COVID-19 Fiscal Measures: 1,247 GEL million, 2.3 percent of GDP. - Revenue measures: 270 GEL million, 0.5 percent of GDP (including income tax relief costing 225 GEL million, 0.4 percent of GDP; property tax exemption for tourism costing 45 GEL million, 0.1 percent of GDP). - Expenditure measures: 977 GEL million, 1.8 percent of GDP (including health and goods/services, microgrants, subsidies and social benefits). - Grants: 85 GEL million, 0.2 percent of GDP (including Credit guarantee scheme 50 GEL million, 0.1 percent of GDP). - Interest rate subsidies on mortgages (below GEL 200,000, issued in 2020): 350 GEL million, 0.1 percent of GDP. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - NBG raised the policy rate by 50 basis points on March 17th, 2021 to anchor inflation expectations and address exchange rate pass-through. - Prior to the increase, the policy rate had been lowered by a cumulative 100 basis points since the start of the pandemic and kept on hold from September 2020 until March 17th, 2021. - Exchange rate policy: - Exchange rate flexibility has helped cushion the economy against the shock of the pandemic; disorderly foreign exchange market conditions have been avoided. - NBG continued foreign exchange market interventions in early 2021 to avoid disorderly market conditions. - Financial sector resilience and policy stance: - Proactive monitoring of financial risks, prudent provisioning, and maintaining supportive measures with respect to capital requirements until the economy is clearly recovering should allow the banking system to support the recovery while avoiding the build-up of vulnerabilities. ### Outlook and risks - Growth projections and scarring: - Growth in 2021 is projected at 3.5 percent, somewhat weaker than projected at the time of the seventh review. - Medium-term growth is expected to recover to 5¼ percent. - The level of real output expected in 2024 is around 11 percent lower compared to the pre-pandemic projection for that year, indicating scarring. - Balance of payments and financing: - Staff projects a balance of payments gap of $0.7 billion in 2021. - Current account deficit projected to narrow from 12.3 percent of GDP in 2020 to 10.9 percent of GDP in 2021. - Financial account surplus projected to slightly decrease to 4.4 percent of GDP in 2021. - Tourism revenue in 2021 projected at only 26 percent of its 2019 level. - The projected BOP gap in 2021 is expected to be closed with IMF and donor financing. - Downside risks noted: - Slower recovery of tourism revenues. - Weaker domestic demand due to uncertain vaccination timeline and voluntary social distancing. - Potential for exchange rate and financial market volatility affecting asset quality and capital buffers. ### Structural reforms and policy recommendations - Decisive implementation of structural reforms is critical to limit economic scarring from the pandemic: - Mobilize investment. - Advance education reform. - Fully implement the new insolvency framework and initiate licensing of insolvency professionals. - Develop local capital markets. - Implement judiciary reforms. - These measures would further improve the business environment and support private sector–led growth. *IMF staff discussions with Georgian authorities were held by videoconference during March 24–29, 2021; this Executive Summary reflects the content of the IMF staff report prepared as of March 31, 2021.* ### 11. The baseline scenario envisages declining inflation and a gradual improvement in the ### 11. The baseline scenario envisages declining inflation and a gradual improvement in the ### Inflation and external balance: baseline projections - Inflation is expected to pick up as the impact of utility subsidies expires and to be higher than the NBG’s target this year. - By 2022, the impact of the still negative output gap should outweigh the impact of higher energy prices and input costs and, assuming the exchange rate remains stable in nominal effective terms, inflation should decline before eventually converging to the three percent target from below. - The current account balance is projected to gradually improve over the medium term, returning to the 2019 level only by around 2026, partly due to the protracted recovery in tourism. - FDI inflows are projected to gradually increase, and—together with robust other inflows—should enable the NBG to maintain reserves at close to 100 percent of the assessment of reserve adequacy (ARA) metric. - External debt is expected to decline to 2019 levels by 2026 (Table 6). ### Key quantitative points (baseline and context) - Reserves: projected to be maintained at close to 100 percent of the ARA metric. - External debt: expected to decline to 2019 levels by 2026. - Current account: expected to return to the 2019 level by around 2026. - Inflation target referenced: three percent target. - Reserve adequacy change: gross international reserves are expected to decline from 111 to 98 percent of the ARA metric in 2021 (mainly due to lower donor support). ### Risks to the outlook (Annex II) - Downside risks: - Emergence of new COVID-19 variants in Georgia or elsewhere could require additional lockdowns and reduce external demand. - Difficulties with vaccine procurement could slow the recovery. - Continued political uncertainty and election-related social unrest could exacerbate lari volatility, reverse the declining trend in inflation, and reduce demand in the short term. - Disorderly depreciation of the lari may threaten financial stability given high dollarization of the economy and the upward trend in NPLs. - Upside risk: - If efforts to control COVID-19 are successful, recovery could be stronger than expected due to pent-up demand and large fiscal support this year. ### Authorities’ views - Authorities broadly agreed with the outlook and characterization of risks. - Recent inflation data suggest upside risks to inflation projections, underscoring the need for vigilance. - Authorities saw continued adverse external developments (including recent impact of financial turmoil in Turkey) as the main near-term risk. ### A. Fiscal policy: providing support to recovery while complying with the fiscal rule - 2021 budget stance: - Remains appropriate; provides temporary and targeted fiscal support and elevated capital spending while beginning convergence towards the fiscal rule. - Implies a mildly contractionary fiscal stance (MEFP ¶8). - Debt and financing: - Gross government debt hovering around 60 percent of GDP (the limit prescribed by the fiscal rule). - Authorities expect to repay domestic debt (0.5 percent of GDP) in 2021 and draw down deposits. - Anticipated substantial external borrowing to finance balance of payments gap. - Over the medium term, domestic issuance should increase to support local bond market development and reduce the share of FX-denominated liabilities. - Spending reprioritization and targeted support: - Little scope to increase the fiscal deficit in 2021 without jeopardizing credibility of the fiscal rule. - Staff suggested extending more targeted measures (e.g., targeted cash transfers to vulnerable households) at a cost of 0.5 percent of GDP by cutting capital spending. - Staff advised against extending less targeted measures such as income tax exemptions and utility subsidies. - Accelerating VAT refunds seen as a promising support measure; authorities committed to continue automatic refunds and reduce the stock of VAT credits. - Fiscal rule and medium-term consolidation: - Georgia’s fiscal rule imposes ceilings on the fiscal deficit (3 percent of GDP) and government debt to be achieved by 2023 (three years after activation of the exit clause due to the pandemic). - Unwinding COVID-19 support measures and reducing capital spending as major infrastructure projects complete are the envisaged paths to compliance (MEFP ¶10). - Incorporating SOEs into general government reporting, set to begin in 2021, could add around 0.8 percent of GDP to debt. - Authorities considering postponing the education spending floor (6 percent of GDP starting in 2022) due to reduced fiscal space. - Transparency and fiscal risk mitigation measures: - Extended feed-in premium scheme to cover all renewable energy projects to ensure technology neutrality; avoid public sector energy investments without independent technical evaluation (MEFP ¶12-13). - Limited operations of the Partnership Fund (PF) in line with program commitments; staff called for dismantling the PF joint-stock company structure (MEFP ¶14). - 2020 Fiscal Risk Statement improved and expanded coverage to 90 percent of SOEs (MEFP ¶15). - Comprehensive SOE reform strategy developed jointly with IMF TA; authorities committed to new governance framework and exploring implementation options (MEFP ¶16). - Progress in reducing outstanding unrefunded VAT credits and commitment to automatic refunding implemented in November 2020 (MEFP ¶19-20). - Georgia Revenue Service (GRS) improvements: risk-based approach, audit case management system pilot completed and to be fully operational by May 2021 (MEFP ¶21). ### B. Monetary and exchange rate policies: anchoring inflation expectations - Policy trade-off: - Monetary policy faces a trade-off between supporting the economy and ensuring inflation remains well controlled (MEFP ¶24). - Most drivers of current inflation are transient, but survey-based inflation expectations remain elevated. - A tight monetary policy stance limits the risk that inflation expectations internalize lari depreciation dynamics and associated inflation. - Continued adverse external developments may necessitate further policy rate increases. - Monetary easing can be reconsidered if inflation pressures remain subdued and inflation expectations are firmly anchored. - NBG stance and exchange rate flexibility: - NBG expressed readiness to tighten further if exchange rate pressures intensify and pointed to supportive fiscal policy as an additional factor supporting tight monetary policy in the near term. - Exchange rate flexibility facilitated macroeconomic adjustment, but high dollarization presents a challenge. - External vulnerabilities increased relative to 2019 given slow recovery of tourism and build-up of external debt (Annex III). - FX sales should be used judiciously if needed to prevent disorderly market conditions (MEFP ¶25–27). - Authorities considering incentives for borrowing and saving in local currency to address high loan and deposit dollarization. ### C. Financial sector policies: dealing with the aftermath of COVID-19 - NPLs and provisioning: - NBG actively monitoring increase in non-performing loans and encouraging banks to promptly recognize losses (MEFP ¶28). - NBG developed standardized scenarios and methodology to assess credit losses expected from delayed COVID-19 recovery; guidelines aim to avoid delays in recognizing potential losses from loan moratoria and restructurings. - Buffers built in March 2020 from preemptive provisioning are still expected to be sufficient, although the gap between the share of NPLs and share of loan loss reserves is beginning to widen. - Staff recommended additional measures: develop markets for distressed assets over the medium term; require NPLs to be written off (or fully provisioned without accounting for collateral value) automatically after a certain period (such as two years). - NBG noted that (i) most market participants view the shock as temporary and favor restructurings; (ii) NBG accounts all impaired assets as NPLs (as opposed to international practice of 90 days past due); (iii) abundant funding liquidity for banks should mitigate impact. - Capital buffers and dividend distributions: - Banks will be given a two-year period to rebuild capital buffers; timeline to start depends on profitability outlook and will be agreed with the industry. - Staff called to limit distributions to shareholders before the full impact of a slower recovery and portfolio impairments due to FX volatility is observed and provisioned for (MEFP ¶30). - Authorities noted banks are keen to restart dividends and have aggressive loan growth targets nearly two times higher than Staff projections. - Reforms and market development: - Implementing regulations of banking resolution framework completed (end-December 2020 SB). - NBG working on measures to develop local capital markets, including legislation on securities’ holding and covered bonds (MEFP ¶33). - Developing the FX swap market could help banks bridge constraints on dollar lending and population demand to save in dollars, helping address rapid FX loan portfolio quality deterioration. - Ongoing IMF/World Bank FSAP will provide recommendations for further reforms once reviewed and finalized. ### Box — Achievements under the EFF program (summary of substantive outcomes) - Objectives and context: - Original program objectives: fiscal consolidation and comprehensive financial sector and structural reforms. - Extended Fund Facility requested in 2017 to address aftermath of regional shock; program extended in December 2019 and augmented in 2020 to help address COVID-19. - External sector and reserves: - Average current account deficit fell from 11.5 percent of GDP (2014–2016) to 6.8 percent of GDP (2017–2019). - Even as COVID-19 pushed the current account deficit back to its 2016 level, gross international reserves increased, reaching almost $4 billion due to external borrowing strategy to increase buffers. - Fiscal consolidation and capital spending: - Average augmented fiscal deficit was 2.4 percent of GDP between 2017 and 2019, compared to 2.6 percent of GDP between 2014 and 2016. - Average capital spending increased from 4.9 percent of GDP (2014–2016) to 6.7 percent of GDP (2017–2019). - Fiscal transparency and tax administration: - Backlog of VAT refunds addressed; automatic refund system implemented to support private sector. - Fiscal risk statement improved, expanded coverage, deeper analysis of PPAs and SOE risks; prompted more cautious approach to PPAs. - Financial sector resilience: - Implemented critical elements of Basel III framework; bank resolution framework and deposit insurance agency established. - Pension reform: - Pension reform implemented, indexing mechanism for basic pensions and establishment of independent Pensions Agency accumulating assets to mobilize domestic savings. ### D. Structural reforms: supporting the recovery and limiting scarring - Education reform: - Authorities resumed education reform (MEFP ¶37); reforming teacher qualification framework and updated decree on teacher career advancement to help attract and retain qualified teachers. - More comprehensive steps needed, including building on progress with remote learning accelerated during pandemic. - Insolvency framework: - New insolvency law establishes timely and efficient insolvency processes and effective rehabilitation framework in line with best international standards (MEFP ¶38). - Introduces licensed insolvency practitioners. - More efficient insolvency procedures should help address expected increase in corporate insolvencies after COVID-19. - Additional business environment recommendations: - Authorities should consider enhancing transparency and efficiency of the judiciary, strengthening governance, and promoting rule of law to improve the business environment. *Source: IMF staff report text provided in content unit 1geoea2021001.* ### 25. Enhancing regional connectivity through infrastructure projects and free trade agreements ### 25. Enhancing regional connectivity through infrastructure projects and free trade agreements ### Regional connectivity and trade policy - Highway construction continued despite the COVID-19 pandemic. - The authorities have initiated a feasibility study on a Free Trade Agreement (FTA) with the Republic of Korea and remain committed to gradually expand an array of FTAs from which Georgia benefits (MEFP ¶39). ### Program issues and financing - Financing assurances are in place for the Eighth Review and the capacity to repay the Fund remains adequate. - Adequate financing for the remainder of the program is assured (Table 7). - Total external debt service remains elevated over the medium term, but debt service to the IMF appears to be manageable, even under downside scenarios. - The full drawing under the program would imply repayments to the IMF at 0.5 percent of GDP or 2.6 percent of GIR in 2026 (Table 8). - The Eighth Review is the last review of the program and no new conditionality was proposed. - The program was broadly successful in meeting its original objectives (Box 1) and contributed to the resilience of the Georgian economy in the face of the COVID-19 shock; it also generated a track record of successful reforms and catalyzed significant assistance from other donors. - The attached MEFP documents the latest outturns for inflation, QPCs and ITs and the structural benchmarks achieved (MEFP Tables 1-3) and signals the authorities’ continued commitment to key elements of the program. - Following the disbursement for the Eighth Review, the stock of outstanding credit will reach 229 percent of quota (Table 8). - Post-Program Monitoring (PPM) is not proposed at this time because the authorities have expressed strong interest in a follow-up program expected within six months of the completion of this review. ### Staff appraisal — macroeconomic outlook and policy priorities - Health and recovery context: - After successfully bringing the second wave of COVID-19 under control, Georgia is at a critical stage in restoring macroeconomic stability and securing the recovery. - The back-to-back shocks of concerns over travel restrictions in the second half of 2019 and the outbreak of the COVID-19 pandemic have depleted the available policy space. - The authorities’ policy response helped limit the human toll of the pandemic and focused on protecting vulnerable populations. - Next policy steps should focus on decisively bringing COVID-19 under control, securing the recovery and maintaining macroeconomic policy discipline in a challenging external and domestic environment. - Growth and output: - Following a stronger than expected contraction in 2020 of 6.2 percent, real output is now expected to increase by 3.5 percent in 2021. - A strong recovery is expected starting in the second quarter of 2021 with the output gap closing by 2024. - Output is not expected to return to its pre-pandemic projected levels within the projection horizon. - Fiscal policy: - Fiscal policy should remain anchored by the need to begin fiscal consolidation to comply with the fiscal rule by 2023. - The 2021 budget provides additional targeted support to vulnerable households and businesses to help cope with the pandemic. - If downside risks materialize and additional fiscal support is needed, the authorities should seek to reprioritize spending (e.g., by reducing capital spending) instead of increasing the deficit. - Increased public debt and sizable contingent liabilities make strict adherence to the fiscal rule especially important to preserve fiscal credibility. - The authorities should continue to monitor fiscal risks by expanding the Fiscal Risk Statement and focus on SOE governance reform to help control and mitigate those risks. - Monetary and external sector policy: - The NBG remains focused on achieving its inflation target. - The most recent policy rate increase was justified as inflation expectations remained elevated following a prolonged period of inflation remaining above the target. - Further increases in the policy rate should not be ruled out if depreciation pressures on the lari persist. - Provided inflation pressures remain subdued and inflation expectations are firmly anchored, the NBG could consider policy rate cuts to support growth. - Exchange rate flexibility has served Georgia well. - The external sector assessment suggests that Georgia’s external position in 2020 was broadly in line with the level implied by fundamentals and desirable policies; however, external vulnerabilities increased relative to 2019 in view of the slow recovery of tourism and the build-up of external debt stock. - The NBG should continue to judiciously use interventions to prevent disorderly conditions on the foreign exchange market. - Financial sector policy: - Financial sector policies should aim to facilitate the recovery and proactively deal with the increase in non-performing loans. - Financial sector remained profitable in 2020 and the majority of the banks remain adequately capitalized, reflecting intense supervision before the crisis. - Banks have been assessing the quality of loan portfolios after the expiration of loan repayment moratoria using uniform standards developed by the NBG. - The NBG is focused on ensuring that losses are promptly recognized, but solvent enterprises and households are not denied financing due to temporary liquidity difficulties. - The timeline for restoring pre-pandemic capital buffers and lifting moratoria for shareholder payouts should be adopted in consultation with the financial sector and based on banks’ capital position, timely recognition of loan losses, and adequate provisioning. - Staff welcomes full implementation of the bank resolution framework, which will further strengthen financial resilience to downside risks. - Structural reforms: - Structural reforms will be essential to sustain a durable and inclusive recovery. - Near-term priorities are operationalizing the insolvency framework to deal with the aftermath of the shock, and education reform. - A comprehensive education reform should help address skills mismatches and limit scarring by eventually increasing job creation, productivity and wages in the aftermath of the pandemic. *Source: 1geoea2021001 - 25. Enhancing regional connectivity through infrastructure projects and free trade agreements* ### 35. Staff supports the authorities’ request for the completion of the Eighth Review. This is the ### 1geoea2021001 - 35. Staff supports the authorities’ request for the completion of the Eighth Review. This is the ### Program status and staff recommendation - Staff supports the authorities’ request for the completion of the Eighth Review. This is the final review of the program. - The program "has helped enhance Georgia’s resilience to shocks, as demonstrated in the last year due to the COVID-19 pandemic." - Staff recommends that the next Article IV Consultation be completed on the 12-month cycle in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747- (10/96)). ### Real sector developments - "The second lockdown halted the recovery. Cumulative output losses are now around 11 percent." - "Recalculated unemployment rates reached a three-year high." - Note: Unemployment rates are recalculated according to the new standards adopted by International Labour Organization (ILO) at the 20th International Conference of Labour Statisticians. This resulted in an increase in unemployment rate of around 4 percentage points. - Inflation dynamics: - "Headline inflation was subdued due to the subsidy on utilities, while core inflation accelerated..." - "...reflecting depreciation against the US dollar as well as in nominal effective terms." - COVID-19 impact on convergence: "COVID-19 set back Georgia’s convergence to EM Europe GDP per capita." ### External sector developments - "Current account deficit is estimated to have widened ... largely due to significant reductions in tourism receipts." - "Remittances increased, as travel restrictions may have shifted some informal remittances to formal channels." - "Financial account inflows remained robust but more reliant on debt financing." - Exchange rate and reserves: - "Exchange rate volatility declined in 2020H2 owing to donor financing and NBG interventions and was in line with peers." - "Reserve coverage reached an all-time high, supported by IMF and donor financing." ### Fiscal sector developments - COVID-19 fiscal impact: - "COVID-19 outbreak dramatically increased the general government deficit." - "COVID-19 outbreak resulted in loss of revenues of around 2 percent of GDP..." - "...along with an almost 5 percent of GDP increase in current spending..." - "...concentrated on social benefits and subsidies and grants to deal with the pandemic." - Financing and debt: - "Gross financing needs are expected to peak in 2020-21 due to the impact of the COVID-19 crisis... triggering an increase in public debt which remains highly exposed to FX risks." ### Financial sector developments - Credit and asset quality: - "Private sector credit growth remained robust on account of local currency credit." - "Watch loans have been rising, but NPLs so far remained subdued, reflecting repayment moratoria." - Profitability and interest rates: - "Profitability sharply deteriorated due to loan loss provisions, though it recovered by the end of the year." - "Interest rates on local currency deposits declined after the initial COVID-19 spike and remain below the policy rate." - "Interest rates on loans remain broadly unchanged." - Dollarization: "Loan and deposit dollarization declined somewhat in the aftermath of the COVID-19 shock." ### Key quantitative indicators and projections (selected exact figures from tables) - Real GDP growth (annual): 2019: 5.0; 2020: -6.2; 2021: 4.3; 2022: 3.5; 2023: 5.8; 2024: 5.5; 2025: 5.2; 2026: 5.2. - Output Gap: 2019: -0.6; 2020: -2.7; 2021: -3.9; 2022: -2.5; 2023: -2.8; 2024: -1.3; 2025: -0.3; 2026: 0.0. - Nominal GDP (billion lari): 2019: 49.3; 2020: 49.9; 2021: 49.4; 2022: 53.9; 2023: 53.3; 2024: 59.3; 2025: 63.9; 2026: 69.6. - Nominal GDP (billion US$): 2019: 17.5; 2020: 16.2; 2021: 15.9; 2022: 17.0; 2023: 16.2; 2024: 18.1; 2025: 19.6; 2026: 21.4. - GDP per capita (thousand US$): 2019: 4.7; 2020: 4.4; 2021: 4.3; 2022: 4.6; 2023: 4.4; 2024: 4.9; 2025: 5.3; 2026: 5.8. - CPI, Period average: 2019: 4.9; 2020: 5.2; 2021: 2.5; 2022: 3.8; 2023: 2.7; 2024: 2.7; 2025: 3.0; 2026: 3.0. - Current account balance (US$ billions): 2019: -0.9; 2020: -1.6; 2021: -2.0; 2022: -1.4; 2023: -1.8; 2024: -1.4; 2025: -1.3; 2026: -1.3. - Current account balance (percent of GDP): 2019: -5.1; 2020: -9.8; 2021: -12.3; 2022: -8.5; 2023: -10.9; 2024: -7.9; 2025: -6.5; 2026: -5.9. - Gross international reserves (US$ billions): 2019: 3.5; 2020: 3.6; 2021: 3.9; 2022: 3.4; 2023: 3.6; 2024: 4.0; 2025: 4.2; 2026: 4.5. - General government debt (percent of GDP): 2019: 40.4; 2020: 56.3; 2021: 60.0; 2022: 59.1; 2023: 60.8; 2024: 58.2; 2025: 56.7; 2026: 54.6. - General government debt net of government deposits (percent of GDP): 2019: 37.5; 2020: 49.6; 2021: 53.6; 2022: 55.1; 2023: 57.5; 2024: 54.4; 2025: 51.8; 2026: 50.1. - Broad money (percent change): 2019: 17.6; 2020: 14.3; 2021: 24.6; 2022: 16.5; 2023: 16.9; 2024: 16.6; 2025: 9.3; 2026: 10.4. - Deposit dollarization (percent of total): 2019: 64.0; 2020: 64.1; 2021: 67.5; 2022: 63.4; 2023: 67.0; 2024: 66.2; 2025: 65.5; 2026: 64.8. - Credit dollarization (percent of total): 2019: 55.4; 2020: 56.9; 2021: 55.7; 2022: 56.7; 2023: 55.0; 2024: 54.9; 2025: 53.9; 2026: 52.9. - Gross external debt (percent of GDP): 2019: 105.6; 2020: 127.0; 2021: 124.8; 2022: 129.0; 2023: 133.9; 2024: 126.2; 2025: 123.1; 2026: 118.0. ### Financial soundness indicators (selected exact figures) - Capital to risk-weighted assets (Basel III): Dec 2018: 18.4; Dec 2019: 19.5; Dec 2020: 17.6. - Nonperforming to total gross loans (IMF definition): Dec 2018: 2.7; Dec 2019: 1.9; Dec 2020: 2.3. - Return on assets (ROA): Dec 2018: 3.0; Dec 2019: 2.5; Dec 2020: -0.9. - Deposit dollarization (residents): Dec 2018: 62.1; Dec 2019: 64.0; Dec 2020: 61.4. ### External vulnerability highlights (selected exact figures) - Current account balance (percent of GDP): 2019: -5.1; 2020: -12.3; 2021: -10.9; 2022: -7.9; 2023: -6.5; 2024: -5.9; 2025: -5.8; 2026: -5.7. - External public debt (percent of GDP): 2019: 34.5; 2020: 49.3; 2021: 54.3; 2022: 49.6; 2023: 46.7; 2024: 43.5; 2025: 40.7; 2026: 38.0. - External debt (percent of GDP, excl. intercompany loans): 2019: 86.9; 2020: 104.1; 2021: 110.3; 2022: 103.9; 2023: 99.9; 2024: 95.2; 2025: 91.0; 2026: 85.5. ### IMF financing and review schedule (selected exact figures) - Proposed IMF EFF disbursement cited in Balance of Payments table: "Proposed IMF EFF 83 31 03 15 10 91 09 0 0 0" (table shows prospective purchase and related schedule items). - Schedule of Reviews and Available Purchases: - Approve the 36-month EFF: 30 (SDR millions) on 12-Apr-17. - Complete the eighth review based on end-December 2020 performance criteria and other relevant performance criteria: 78 (SDR millions) on 20-Mar-21. - Total available: 484 (SDR millions). *Source: National authorities, Haver, GEOStat, NBG, Ministry of Finance, and IMF staff calculations as presented in the content unit.* ### Annex I. Public Debt Sustainability Assessment ### Annex I. Public Debt Sustainability Assessment ### Overall assessment and projections - Public debt is assessed as sustainable, with fiscal consolidation and higher growth expected to put the public debt-to-GDP ratio on a downward path after a sharp rise in 2020-21 due to the COVID-19 pandemic. - Debt-to-GDP is projected to peak at close to 61 percent of GDP in 2021 before declining and complying with the 60 percent of GDP ceiling by 2023, prescribed by Georgia’s fiscal rule. - Public gross debt (nominal gross public debt, in percent of GDP): 33.9 (2019), 40.4 (2020), 60.0 (2021), 60.7 (2022), 58.1 (2023), 56.7 (2024), 54.6 (2025), 52.8 (2026), 51.3 (cumulative/projection series). - Public gross financing needs (in percent of GDP): 4.2 (2019), 6.5 (2020), 14.3 (2021), 15.5 (2022), 8.0 (2023), 6.3 (2024), 6.2 (2025), 6.7 (2026), 6.2 (final entry in series). - In 2026, public debt is projected at 51 percent of GDP in gross terms and 48 percent of GDP measured net of government deposits. - Government deposits increased by 3.6 percent of GDP in 2020; government deposits are projected at 2.9 percent of GDP (providing some cushion for the fiscal rule). ### Drivers of the 2020 rise in debt - The sharp 20 percentage point of GDP increase in public debt in 2020 reflects: - A widening fiscal deficit due to a drop in GDP and revenues and a rise in spending, including the government’s fiscal relief package in response to COVID-19 (3.8 percent of GDP), accelerated VAT refunds, and elevated capital spending. - Accumulation of government deposits (increase by 3.6 percent of GDP) to guard against downside risks. - Exchange rate depreciation and economic contraction (base effect). - Other residual debt-increasing factors. ### Fiscal rule and compliance - Georgia’s fiscal rule (Liberty Act) imposes a 60 percent ceiling on gross general government debt to be attained by 2023 (within three years of the escape clause triggered due to the pandemic). - Projected public debt is around 57 percent of GDP in 2023, close to but in compliance with the fiscal rule; the rule provides very little room for relaxing fiscal policy and stresses the urgency of commencing fiscal consolidation in 2021 to avoid a more abrupt consolidation path in 2022-23. - Incorporating SOEs into general government reporting in 2021 will add to projected debt and further limit space within the fiscal rule’s limits. ### Risks, stress tests, and vulnerabilities - Main current risks stem from the high share of foreign exchange (FX) denominated debt: 80 percent of public debt is FX-denominated, making debt dynamics vulnerable to exchange rate depreciation. - Market and maturity features: - The government has secured debt of long-term maturity (representing over 97 percent of outstanding debt). - Public debt service profile is relatively smooth, averaging 4.1 percent of GDP over 2022-26. - Much external debt service is owed to international finance institutions at concessional terms. - A $500-million sovereign Eurobond maturing on April 12, 2021 is expected to be refinanced; the Ministry of Finance has sent a Request for Proposal to numerous banks and has sufficient liquidity in the form of deposits to bridge any time gaps for the re-issuance. - Standardized macro-fiscal stress tests: - Public debt remains sustainable and below high-risk thresholds in all standardized stress tests (shocks to real GDP growth, the primary balance, real interest rate, and real exchange rate). - Debt would not stabilize under the constant primary balance scenario, but this scenario is considered unrealistic given authorities’ record of fiscal discipline and the pandemic shock. - Under a combined macro-fiscal shock (low growth, inflation, deteriorated primary balance, high interest rates), debt levels breach benchmark thresholds, but that scenario would also breach Georgia’s fiscal rule (which imposes a deficit ceiling of 3 percent) and is judged unlikely. - Stress tests highlight increased vulnerabilities to high gross financing needs and external financing requirements, partly due to the Eurobond maturity in 2021 and the high FX share. ### Contingent liabilities and SOEs - The public debt analysis does not incorporate contingent liabilities to the general government. Key fiscal risks stem from power purchasing agreements and state-owned enterprises (SOEs). - A comprehensive sectorization exercise of SOEs in 2020 revealed 183 enterprises to be incorporated into the general government sector starting in 2021. - The 2020 Fiscal Risk Statement estimates the hypothetical impact of this exercise on 2019 fiscal statistics would increase debt by 0.8 percent of GDP. - The impact of incorporating these SOEs in public finance statistics is yet to be estimated for 2021-26. - Authorities are committed to comprehensive governance reform of SOEs, which will help reduce fiscal risks. ### Policy implications and recommendations - Commence fiscal consolidation in 2021 to comply with the fiscal rule while avoiding abrupt consolidation in 2022-23. - Incorporate SOEs into general government reporting for enhanced monitoring of fiscal risks and to align statistics with sectorization outcomes. - Deepen the local capital market and reduce the share of FX-denominated debt over the medium term to lower vulnerability to exchange rate depreciation. - Continue SOE governance reforms to mitigate contingent liability risks and improve transparency in fiscal risk management. *Source: IMF staff, Annex I. Public Debt Sustainability Assessment (Georgia).* ### Annex II. Risk Assessment Matrix ### Annex II. Risk Assessment Matrix ### Conjunctural Shocks and Scenarios - Unexpected shifts in the Covid-19 pandemic: Asynchronous progress, Limited access to, and longer-than-expected deployment of, vaccines in some countries—combined with dwindling policy space—prompt a reassessment of their growth prospects (for some Emerging and Frontier Markets triggering capital outflows, depreciation and inflation pressures, and debt defaults). - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Key risks: Capital outflows in context of high current account deficit would threaten external stability, likely resulting in lari depreciation and accelerating inflation. - Policy Response: - Maintain commitment to exchange rate flexibility, but utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability. - Tighten monetary policy to keep inflation expectations anchored. - Prolonged pandemic: The disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them), requiring costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. For countries with policy space, prolonged support—while needed to cushion the economy—exacerbates stretched asset valuations, fueling financial vulnerabilities. For those with limited space, especially EMs, policy support is insufficient. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Key risks: Insufficient policy support during prolonged pandemic would likely increase poverty among vulnerable populations in informal employment. Lack of tourism recovery would reduce medium-term growth. - Policy Response: - Extend targeted measures to support individuals and businesses by reprioritizing spending. - To the extent that inflation expectations remain anchored utilize available monetary policy space to support demand. - Faster containment: Pandemic is contained faster than expected due to the rapid production and distribution of vaccines, boosting confidence and economic activity. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Key outcomes: Higher growth in trading partners would enable a faster recovery in Georgia. - Policy Response: - Maintain prudent macroeconomic policies to build up buffers. - Proceed with fiscal consolidation. - Widespread social discontent and political instability: Social tensions erupt as the pandemic and inadequate policy response cause socio-economic hardship (unemployment, poverty, and shortages and higher prices of essentials—often exacerbating pre-existing inequities), or due to unequal access to vaccines. Growing political polarization and instability weaken policymaking and confidence. - Likelihood: High - Expected Impact on the Economy if Risks Materialize: High - Key risks: Political polarization and social tensions could result in a disorderly lari depreciation. Social tensions would undermine the ability of the policymakers to set a new agenda for structural reform. They could also threaten external financing flows from international financial institutions (IFIs) on which Georgia relies. - Policy Response: - Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability. - Improve communication about economic policy – especially in terms of setting a medium-term reform agenda. - Maintain commitment and ownership of reforms. ### Structural Risks - Accelerating de-globalization: Despite renewed efforts to reach multilateral solutions to existing tensions, geopolitical competition leads to further fragmentation. Reshoring and less trade reduce potential growth. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: Medium - Key impacts: Accelerating de-globalization would put the merits of Georgia’s efforts to become a logistics hub in doubt. The country would need to find a new growth model that relies less on the external environment. - Policy Response: - Allow the exchange rate to adjust to reflect the new fundamentals. - Utilize monetary policy space to ensure that the output gap does not stay negative for too long. - Extend targeted measures to support individuals and businesses by reprioritizing spending. ### Georgia-Specific Structural Risks - Financial risks: As a result of one of the global shocks above, exchange rate could depreciate rapidly undermining confidence in the currency and increasing inflation expectations. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Key impacts: Depreciation in a highly dollarized economy could hurt growth and threaten financial stability as households and firms struggle to repay loans. Higher inflation and depreciation expectations could result in a vicious cycle of loan conversions putting further pressure on the currency. - Policy Response: - Maintain tight monetary policy to ensure confidence in the currency and keep inflation expectations anchored. - Strengthen the resolution framework to ensure that financial stability challenges can be addressed. - Adjust macroprudential measures to avoid an undue tightening of financial conditions. - Fiscal risks: Materialization of contingent liabilities/fiscal risks could put pressure on the deficit. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Key impacts: The need to cover contingent liabilities could result in lower capital spending or lower current spending, which has already been significantly compressed. - Policy Response: - Continue improving SOE governance and fiscal risk management practices. - Utilize fiscal buffers accumulated due to capital markets development strategy. - Political risks: Political instability and/or reform fatigue could undermine efforts to undertake structural reforms. - Likelihood: High - Expected Impact on the Economy if Risks Materialize: Medium - Key impacts: Policy uncertainty could undermine confidence and hurt growth. - Policy Response: - Maintain macroeconomic policy discipline. - Strengthen social safety nets to protect the most vulnerable segments of the population and ensure that growth is sufficiently inclusive. --- ### External Sector Assessment (selected findings included with Annex II content) - Overall assessment overview: - "Georgia’s external position in 2020 was broadly in line with the level implied by fundamentals and desirable policies." - COVID-19 shock dampened tourism revenues and widened the current account deficit significantly, and external vulnerabilities increased relative to 2019 in view of the slow recovery of tourism and the build-up of external debt stock. - The Net International Investment Position (NIIP) widened in 2020, although it is deemed sustainable according to the external sustainability approach. - Gross international reserves (GIR) coverage reached 111 percent of the ARA metric and the NIR target was met with a comfortable margin at end-2020. - The current account (CA) deficit is projected to gradually narrow to 5.7 percent of GDP by 2026. - Policy guidance: Continued prudent fiscal policy, exchange rate flexibility, and structural reforms implementation remain essential to safeguarding external sustainability over the medium term. - Current Account and Real Exchange Rate Developments: - 2020 CA deficit is estimated at 12.3 percent of GDP, 7.2 percentage points higher than in 2019. - Tourism revenue lower by 83 percent (y/y) in 2020. - CA deficit projected to narrow to 10.9 percent of GDP in 2021, driven partly by tourism revenue recovery by 56 percent (y/y). - Tourism revenue expected to recover to the 2019 level only in 2024. - Medium-term CA deficit expected to decline to 5.7 percent of GDP, assuming gradual recovery in exports and timely implementation of structural reforms. - Lari depreciated by 5.6 percent (nominal) and 7.4 percent (real effective) in 2020. - NEER depreciated by 1.0 percent m/m in February 2021 versus 3.0 percent m/m in November 2020. - EBA-lite CA approach outcomes and adjustments: - CA-Actual: -12.3 - Cyclical contributions (from model): (-)0.4 - COVID-19 adjustor (+)1/: 4.6 - Adjusted CA: -7.9 - CA Norm (from model)2/: -7.5 - Adjusted CA Norm: -7.5 - CA Gap: -0.4 (CA approach) and 2.4 (REER model) - REER Gap (in percent): 1.2 (CA approach) and -6.5 (REER model) - Tourism adjustor equals 5.39 percent of GDP, and the oil trade balance adjustor equals -0.75 percent of GDP. - External Balance Sheets and NIIP: - By 2020 Q3, Georgia’s NIIP stood at 151.7 percent of GDP. - FDI and loans account respectively for about 52.9 percent and 31.3 percent of total liabilities. - Relative to end-2019, the NIIP widened by 16.8 percent of GDP, mainly driven by higher loan disbursements (by 14.7 percent of GDP), higher net FDI inflows (by 4.9 percent of GDP), and a lower nominal USD-denominated GDP. - FDI liabilities increased by 8.6 percent of GDP (relative to end-2019) to 117 percent of GDP. - An important contributor to external debt stock build-up in 2020 was the increase in the government’s concessional loans to IFIs (by around $1.2 billion); the private sector’s external debt remained virtually unchanged in nominal terms. - Capital and Financial Flows: - Financial account surplus in 2020 estimated at 5.5 percent of GDP. - This surplus is slightly lower than 2019 and much higher than projected in the Seventh Review (by 2.9 percentage points). - Net FDI inflows and net portfolio inflows were much lower than 2019 (by 1.9 and 5.1 percent of GDP y/y, respectively). - Net loan inflows were much higher (by 2.2 percent of GDP y/y), reflecting large inflows of donor financing. - Financial account surplus projected to gradually decrease to about 6 percent of GDP over the medium term (after a temporary increase in 2022). - Over the medium term, the bulk of Georgian debt is expected to remain held by IFIs and related parties—mostly on concessional terms; external debt expected to remain dominated by medium and long-term debt. - Reserves: - Net international reserves (NIR) stood at $1,335m (program exchange rate) and GIR at $3,911m (market exchange rate) by end-2020. - GIR reached 111 percent of the ARA metric at the end of 2020. - NIR target revised down by $201m to $899m and was met with a comfortable margin. - GIR coverage in 2021 projected at 98 percent of the ARA metric (slightly higher than Seventh Review projections due to higher end-2020 reserves and continued donor financing), though GIR in 2021 expected to decrease relative to 2020. - Concluding assessment: - Georgia’s external position in 2020 assessed broadly in line with fundamentals and desired policy settings after accounting for temporary pandemic impacts on tourism and oil trade balance. - External vulnerabilities increased due to protracted recovery in tourism, a gradually narrowing CA deficit, the high NIIP, build-up in external debt stock, and pressures on reserves. - Policy recommendation: Strong and prudent macroeconomic policies are needed to maintain and strengthen external sustainability over the medium term. *Prepared by S. Saksonovs. International Monetary Fund.* ### 2. The second lockdown has delayed the recovery. A standstill in global travel and renewed ### 2. The second lockdown has delayed the recovery. ### Macroeconomic impact and outlook - Real GDP growth of -6.2 percent in 2020, 1.1 percentage point below Seventh Review projections. - Expected real GDP growth of 3.5 percent in 2021 as domestic demand recovers and the economy benefits from continued fiscal support envisaged in the 2021 budget. - Medium-term growth remains unchanged at 5¼ percent, hinging on advancing structural reforms to increase productivity and enhance private-sector led growth. - Inflation accelerated to 3.6 percent (y/y) in February 2021 and is expected to increase further reflecting higher input costs, energy prices and exchange rate depreciation pass-through. - The NBG increased the policy rate by 50 basis points in March (policy action dated March 17th in the MEFP) to anchor inflation expectations. - Inflation should decline to below the NBG’s target in 2022 as the effect of the still negative output gap begins to dominate cost-push factors; inflation is expected to converge to target from below. - The current account deficit widened to 12.3 percent of GDP, 2.5 percentage points weaker than Seventh Review projection, largely due to a weaker-than-expected income account and trade balance partially compensated by higher transfers. - Gross international reserves (GIR) reached 111 percent of the IMF’s ARA metric. - Over the medium-term, the current account deficit is expected to decline very gradually, reaching 2019 levels only by 2026. - Resilient FDI inflows and higher portfolio flows are expected to enable the NBG to maintain reserves close to 100 percent of the ARA metric over the medium term. - Downside risks: vaccine shortages, emergence of new virus variants, protracted slowdown in major trading partners, intensified geopolitical tensions; policy defense: exchange rate flexibility, sound macroeconomic and financial policies, and gradual structural reforms. ### Fiscal response and the 2021 budget - In 2020, temporary and targeted fiscal support to individuals and businesses totaled 3.8 percent of GDP. - The 2021 budget extends key targeted support measures, including cash transfers, at a total cost of 2.3 percent of GDP. - Adopted 2021 budget envisages an augmented deficit of GEL 4,082 million (7.7 percent of GDP), implying a mild contractionary stance. - Capital spending reached 8.6 percent of GDP in 2020, exceeding the amended budget by GEL 708 million. - Capital spending (including gross budget lending) will remain elevated at 8.4 percent of GDP in 2021. - In December 2020, support to subsidize electricity tariff hikes cost GEL 105 million (full amount for low-energy consuming households and 50 percent for food producers), to be accommodated through spending reprioritization. - General government debt reached 60 percent of GDP in 2020; due to exceptional circumstances the debt limit is not binding for a three-year period until 2023. - General government debt expected to remain slightly above 60 percent of GDP in 2021, then decline in the medium term as temporary COVID-19 spending is reduced and growth resumes. - Most debt is to multilateral creditors, with long average maturities and low interest costs; debt is mostly vulnerable to FX risks. - Policy commitments: - Bring the fiscal deficit under 3 percent of GDP and public debt under 60 percent of GDP by 2023 (Liberty Act). - Refrain from initiating additional Power Purchase Agreements (PPAs) that deviate from a feed-in premium until criteria are clarified. - Refrain from signing additional PPAs except in specified cases and from engaging the public sector in energy investment without an independent technical evaluation and IMF consultation on fiscal sustainability. - Will not (i) accumulate any general government’s external debt payment arrears outside those under negotiation; (ii) accumulate net domestic expenditure arrears of the general government; or (iii) issue new public guarantees or comfort letters. - Public corporations will refrain from new quasi-fiscal activities; government will refrain from asking SOEs to engage in new quasi-fiscal operations. - Policy on power generation: - Amended Government Decree 403 to promote hydropower and other renewable projects through a feed-in premium to ensure technology neutrality and limit fiscal risks. - Will specify criteria for deviations from the feed-in premium and refrain from PPAs that deviate until criteria are clarified. ### Fiscal performance, financing, and risk management - Augmented fiscal deficit in 2020 reached GEL 4,617 million against an adjusted ceiling of GEL 4,998 million. - Primary current expenditure totaled GEL 12,190 million compared to an adjusted ceiling of GEL 12,517 million. - Refunds of VAT claims in 2020 totaled GEL 1,040 million (2.1 percent of GDP). - The higher deficit in 2020 was financed mostly by donor and IMF financing. - Plans to refinance the Eurobond maturing in April 2021 to preserve buffers; plans to delay expansion of domestic issuance. - Commitment to deepen the local capital market and reduce the share of FX-denominated debt over the medium term. - Expanded Fiscal Risk Statement (FRS) covering over 90 percent of SOEs, including sectorization exercise, gross financing requirements of major SOEs, and updated estimates of quasi-fiscal activities (end-December 2020 structural benchmark). - 2020 FRS includes SOE governance reform plans and a sub-section on the impact of COVID-19; 2021 FRS will extend this analysis. - Will incorporate individual assessment of risks from the largest five PPA contracts indicating annual fiscal costs during PPA periods. - Will refrain from taking over any SOE debt or providing equity injections to SOEs without a comprehensive strategy supporting commercial viability and improved corporate governance. ### IMF program status and program conditionality - The IMF’s Extended Fund Facility (EFF) arrangement has helped safeguard macroeconomic stability and catalyze significant donor assistance. - Commitment to policies in the Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) of March 27, 2017, updated most recently on December 1, 2020. - Conditionality for the Eighth Review was met with one exception: implementation of the new insolvency law (requirements for the new profession of insolvency practitioners specified, but licensing not yet begun). The new law enters into force on April 1st, 2021 and licensing expected to begin in April. - Request for completion of this review and release of related disbursement: intend to purchase SDR 78 million, bringing total drawings under the arrangement to SDR 484 million. - This is the last review of the program; no further QPCs or structural benchmarks are set. - Continued engagement with IMF staff on economic developments and policies, including upcoming Article IV consultation; authorization to publish LOI, attachments, and related Staff Report after IMF Executive Board approval. ### Structural fiscal and revenue administration reforms - Strengthening revenue administration to improve taxpayer services and compliance; reform program supported by the Revenue Mobilization Trust Fund largely completed following the 2016 Tax Administration Diagnostic Assessment and IMF TA. - Reduced stock of unrefunded VAT credits within the limitation period for audit from GEL 1.4 billion at end-2017 to GEL 1,184 million at mid-December 2020, compared to the indicative target of GEL 1,470 million and down from GEL 1,303 million in mid-June; aim to reduce outstanding stock of VAT claims to GEL 1.0 billion by July 2021. - Automatic refunding of new VAT credits implemented starting in November 2020; more than 90 percent of VAT credit claims (measured as the number of declarations) are automatically approved. - Target: value of automated processed tax declarations will be more than 85 percent by July 2021. - Tax administration improvements: - Use risk-based audits to identify non-compliant cases likely to produce higher yields. - Training: audit case management system training started February 8th, 2021; as of March 26th, 162 auditors had been trained. - By May 2021, the audit case management system should be fully operational to enhance audit timeliness and productivity. - The GRS will create a register of employees for tax administration purposes by end–2021. - Expanded information sharing with government agencies and the Financial Monitoring Service (FMS) for monitoring suspicious transactions. - Automatic reporting from financial institutions will be considered in the context of international reporting requirements under the automatic exchange of financial information for tax purposes, which Georgia has committed to implementing by September 2023. *Memorandum of Economic and Financial Policies (Attachment I) excerpt, Government of Georgia, as presented in the provided IMF document.* ### 22. We believe that accurate and transparent budgeting and accounting is a cornerstone of ### 1geoea2021001 - 22. We believe that accurate and transparent budgeting and accounting is a cornerstone of ### Fiscal transparency, SOEs, and accounting - Commitments: - Make the coverage of General Government consistent with the classification of SOEs into General Government units and Public Corporations. - Incorporate data from SOEs classified as general government in fiscal reports and create mechanisms to have timely access to information. - Initially compile SOE data for the reporting year 2019 and estimates of 2020 according to GFSM 2014. - Any newly identified SOEs will be considered general government entities until sufficient evidence to classify them to the public corporation sector. - Improve the quality of fiscal reports and comply with international accounting standards. - Starting in 2021, produce an annual consolidated central government sector financial report based on International Public-Sector Accounting Standards (IPSAS) basis. - Tax expenditures: - The 2021 Budget documentation includes a statement on selected Value Added Tax (VAT) expenditures. - Aim to undertake a comprehensive tax expenditure review by end-2021, with IMF and USAID support. ### Monetary policy and inflation framework - Commitments and stance: - Continue commitment to inflation targeting (IT) framework to maintain price stability. - Monetary policy decisions will depend on the inflation outlook; monitor inflation expectations closely to balance controlling elevated expectations with supporting demand after the COVID-19 pandemic. - Continued adverse external developments may require further increases in the policy rate to preserve price stability. - Exchange rate and FX policy: - Maintain a flexible exchange rate regime to protect the economy against external shocks while preventing excessive lari volatility. - Use reserves only to avoid disorderly market conditions; suspended accumulation of reserves in aftermath of the COVID-19 shock and focused on providing FX liquidity. - FX sales remain mostly ad-hoc interventions complemented by smaller sized and rule-based FX sales triggered by exchange rate volatility and FX market liquidity needs. - Plan to finalize an FX intervention strategy by May 2021 to improve transparency of FX interventions. - Key reserve statistics: - End-December NIR reached $1,335 million, significantly above the adjusted target (adjusted downwards to $899 million due to lower external disbursements). - The authorities note the situation remains volatile and commit to intervene if needed to avoid disorderly market conditions. - Medium-term objectives: - Start rebuilding external buffers as the economy recovers and market conditions allow. - Intervention strategy guided by reserve adequacy and price stability goals; reserve accumulation objectives may be suspended when markets become disorderly. - Strengthen National Bank of Georgia (NBG) communication. ### Financial sector policy, supervision, and resolution - Non-performing loans and provisioning: - Monitor increases in non-performing loans and encourage banks to promptly recognize losses related to the pandemic. - Banks asked to evaluate loan portfolio quality; on-site inspections suspended; encouraged use of moratoria on loan repayments; moratorium on fines where breach emerged due to crisis. - Provided standardized scenarios and methodology to assess credit loss expected from delayed COVID-19 recovery. - Provisioning methodologies: - Business loans: based on forecasted 2022 debt-service-coverage and debt-to-ebitda ratios incorporating standardized sectoral forecasts. - Retail loans: assessed based on overdue days, restructuring status, previous use of moratorium, and payment-to-income ratios. - Banks conducted granular assessments to determine adequate general and specific provisions to ensure viable enterprises are not denied financing due to temporary liquidity difficulties. - Capital, large exposures, and distribution restrictions: - Pandemic support: released capital requirements in March 2020 by more than 3 percentage points for CET–1. - Plan to give banks a two-year period to re-build capital buffers, subject to economic recovery path. - Distributions to shareholders restricted for banks until capital buffers are fully re-built. - Large exposure limit tightened to 25 percent of Tier–1 capital for both related and non-related parties; banks granted until June 2022 to comply. - From January 2022, banks should refrain from creating any new exposures that breach the 25 percent limit. - Regular collection of additional information from banks about the financial situation of large borrowers and monitoring of portfolio concentration risk. - Reporting and regulatory transitions: - Initiated transition from local accounting practices to International Financial Reporting Standards (IFRS). - From 2021, voluntary move to IFRS-based reporting allowed; banks must meet regulations under local accounting standards in parallel. - Banks required to fully transfer financial and regulatory reporting to IFRS by January 2022 while keeping local accounting standards in parallel; parallel reporting to be abolished starting from 2023. - Developed IFRS-based supervisory reporting standards and forms, new principles on asset provisioning, and guidelines on models used for provisioning; aim for no material impact on prudential requirements. - Once fully transitioned, request capital adequacy information on both stand-alone and consolidated basis under IFRS using relevant prudential filters. - Governance, concentration, and fit-and-proper rules: - Will develop regulation on fit-and-proper requirements for shareholders and beneficial owners of holding companies in line with EU legislation and Basel standards by June 2021. - Close to finalizing secondary legislation on notifying and approving concentration in the banking sector (mergers, acquisition of controlling holding) and procedures to investigate complaints on competition violations. - Resolution framework and ELA: - Completed rollout of implementing regulations of the new banking resolution framework. - Issued secondary legislation on: resolution plans; temporary administrator and special manager; recapitalization tools including the bail-in; temporary public support and ex-post resolution fund; and ELA against government guarantees (end-December 2020 structural benchmark). ### Capital markets, larization, and consumer protection - Capital markets and covered bonds: - Legislation for securities holding (dematerialized securities holding) expected to be approved in the third quarter of 2021. - Legislation for covered bonds expected by the end of 2021 to improve access to long-term lari funding and help develop the fixed-income market. - New securities holding framework to strengthen investor protection and incorporate an indirect holding regime where only banks and brokers authorized to hold securities on behalf of clients. - Primary dealer (PD) system operating in pilot mode since October 2020; includes a single issuance of a five-year bond to be reopened periodically and six participating commercial banks. - Consumer protection: - Developed a new Rule on Consumer Protection for Financial Organizations to better reflect requirements of relevant EU directives; rule enacted on April 1st, 2021. - Changes include: - Requiring financial institutions to provide the consumer with a choice of credit related insurance products (applies if financial institution requires insurance for disbursing a loan or insures credit itself; credit related insurance is not mandatory). - Obligation to inform consumer of the right to independently purchase insurance at minimum terms acceptable for the financial institution. - Notification periods and requirements for unilateral change of the terms of a credit or deposit contract, including disbursements of new loans under previous agreements. ### Structural reforms and recovery agenda - Objectives: - Implement comprehensive structural reform agenda to support recovery and limit economic scarring from the pandemic. - Reforms aim at strengthening connectivity (infrastructure and trade), improving education and vocational training, mobilizing savings, improving the business environment, and implementing land and energy reforms to boost productivity and raise long-term potential growth while limiting scarring. - Continue targeted social assistance and healthcare to protect the most vulnerable. - Infrastructure and connectivity: - Advance investment in core infrastructure to transform Georgia into a transport and logistics hub connecting Europe with Asia. - Two out of four subsections of the East-West Highway (F2 and F3) are well underway; construction on remaining subsections (F1 and F4) is at an early stage. - Education: - Revisit comprehensive education reform to improve job creation, productivity and wages post-pandemic. - Updated decree on teacher career advancement to establish a non-discretionary approach by abolishing credit-point accumulation system and introducing special exams for teacher promotion at each level of teacher status. - Business environment and insolvency: - Corporations will gradually be required to publish audited financial statements based on IFRS standards to improve corporate governance. - Parliament approved a new insolvency law in September 2020 to provide adequate protection of creditor rights, timely and efficient insolvency processes, and effective rehabilitation framework in line with best international standards. - Issued ministerial decree establishing requirements for insolvency practitioners; actual licensing to begin after April 1st (end-March 2021 structural benchmark). - Trade: - Signed a free trade agreement (FTA) with the U.K. - Negotiating expansion of current FTA with Turkey. - Initiated a feasibility study on an FTA with the Republic of Korea in February 2021. - Committed to pursuing other FTAs with priority countries including the United States, Israel, and the GCC countries. ### Program monitoring, targets, and safeguards - Monitoring framework: - Program monitored through quantitative performance criteria, indicative targets, an inflation consultation clause, and structural benchmarks. - Quantitative performance criteria and indicative targets for end-December 2020 are listed in Table 2; structural benchmarks in Table 3; Technical Memorandum of Understanding attached to describe definitions and data provisions. - Safeguards and audits: - NBG maintains a strong safeguard framework and internal control environment. - Continue to engage independent external audit firms to conduct NBG audit in accordance with international standards. - Selected program numeric outcomes and targets (as presented): - End-December NIR outturn: $1,335 million (Met versus adjusted target $899 million). - Ceiling on augmented general government deficit (program definition) — end-December outturn presented as 4,617 (Met). - Ceiling on general government net budget lending — end-December outturn presented as 104 (Met). - Primary Current Expenditures of the General Government (mn lari): target 12,450; outturn 12,517; status Met. - Stock of VAT credits: target 1,470; outturn 1,184; status Met. - Structural benchmarks status highlights (selected): - Adoption of multiple financial sector, capital markets, and bank resolution measures marked Met (dates and individual items listed in the structural benchmark table). - Some tax administration, PPP, fiscal risk statement, and insolvency-related benchmarks noted as Not Met or implemented with delays; several items have specified implementation delays (months or weeks) noted in the structural benchmark table. *Source: Technical content of the IMF staff report chapter provided in the source PDF.* ### 1. This Technical Memorandum of Understanding (TMU) defines the variables subject to ### 1geoea2021001 - 1. This Technical Memorandum of Understanding (TMU) defines the variables subject to ### A. Program Assumptions - All foreign currency denominated assets will be valued in lari at program exchange rates specified below. - Amounts denominated in currencies other than the U.S. dollar will be converted into U.S. dollar amounts using the cross-rates as of December 31, 2016, published on the IMF web site. - Table 1. Georgia: Program Exchange Rates - SDR Special Drawing Rights 0.7439 - GEL Georgian lari 2.6468 - AUD Australian dollar 0.7227 - CAD Canadian dollar 0.7419 - EUR Euro 1.0556 ### B. Institutional Definition - General government comprises central government and local governments, excluding Legal Entities of Public Law; includes any new funds or extra-budgetary entities performing fiscal operations per GFSM 2001. - General government coverage excludes state-owned companies and the Partnership Fund. - Public sector consists of the general government, Legal Entities of Public Law, public financial and non-financial corporations, including the National Bank of Georgia and the Partnership Fund. - Reporting commitments: - Monthly general government revenues: detailed information within two weeks of the end of each month. - Monthly central government expenditures and arrears: within four weeks of the end of each month. - Stock of general government debt, by currency and original maturity: within one month from the end of each quarter. - Daily cash balances in all accounts of the general government: as of the end of the previous business day. ### C. Quantitative Program Targets - Program monitored via performance criteria and indicative targets. - Performance criteria include: - Ceiling on the augmented cash deficit of the general government (performance criterion). - Ceiling on net budget lending operations (performance criterion). - Floor on net international reserves (NIR) of the NBG (performance criterion). - Continuous ceiling on accumulation of external debt arrears by the general government (performance criterion). - Ceiling on new guarantees issued by the public sector (performance criterion). - Ceiling on the cash deficit of the Partnership Fund (performance criterion). - Ceiling on new net borrowing by the Partnership Fund (performance criterion). - Indicative targets include: - Ceiling on primary current spending of the general government. - Ceiling on outstanding VAT credits. - Ceiling on new domestic expenditure arrears by the general government. - Additional continuous performance criteria applicable to all Fund arrangements (monitored continuously): - No imposition or intensification of restrictions on payments and transfers for current international transactions. - No introduction or modification of multiple currency practices. - No conclusion of bilateral payments agreements inconsistent with Article VIII of the IMF Articles of Agreement. - No imposition or intensification of import restrictions for balance of payments reasons. - Test dates and monitoring: - Performance criteria and indicative targets set for end-June 2020 and end-December 2020. - Monitored on a cumulative basis from the beginning of the calendar year, except: - NIR target monitored in terms of stock levels. - New net borrowing by the Partnership Fund monitored since program approval. - Continuous performance criteria monitored on a continuous basis. ### D. Inflation Consultation Mechanism - Inflation consultation bands set around projected inflation path for each test date. - Test date inflation defined as year-on-year percentage change of monthly CPI in the month of the test date as measured and published by GEOSTAT. - If test date inflation falls outside the outer bands (Table 1 of the MEFP): - Authorities will consult with the IMF Executive Board on monetary stance, reasons for deviation, and proposed policy response. - Access to Fund resources would be interrupted until consultation and relevant program review are completed. - If test date inflation falls outside the inner bands (Table 1 of the MEFP): - Authorities will consult with IMF staff on reasons for deviation and proposed policy response. ### E. Program Definitions, Adjustors, and Reporting Requirements - General Government: Ceilings on augmented cash deficit and net budget lending - Definition: Augmented cash balance = revenues minus expense, minus net acquisition of non-financial assets (GFSM 2001), minus net budget lending. A negative augmented cash balance is a deficit. - Measurement: Measured from financing side at current exchange rates established by the NBG at the date of transaction. - Augmented cash deficit measured as: - i) net acquisition of financial assets (including changes in balances of the revenue reserve account), excluding net budget lending as defined by GFSM 2001; minus - ii) net incurrence in domestic and foreign liabilities as defined in GFSM 2001. - Adjustors to ceiling on augmented cash deficit: - Adjust upward/downward by cumulative total amount of foreign-financed project loan disbursements above/below program amounts (Table 2). - Adjust downward by cumulative receipts from sale of non-financial assets above program amounts (Table 2). - Adjust upward/downward by cumulative amount of VAT credits refunded in cash above/below program amounts (Table 2). - Adjustor to ceiling on net budget lending: - Adjust upward/downward by cumulative on-lent amounts from foreign-financed project loan disbursements above/below program amounts (Table 2). - Healthcare COVID-19 adjustor: - Ceilings on augmented cash deficit and primary current spending (indicative target) adjusted upward/downward for healthcare costs related to preventing COVID-19 spread and treating COVID-19 cases in excess of the originally planned amount of GEL351 million (Table 2). - Activities included defined by: - Government Decree #164 28.01.2020: Article 4.1; Article 4.8; Annex #20 “Managing Novel COVID-19” of Government Decree #674 31.12.2019 as added by Government Decree #176 17.03.2020. - Government Decree #653 25.12.2019 “On approving 2020 State Program of Rehabilitating and equipping Medical Facilities”. - Table 2. Georgia: Projected Financing for Cash Deficit of the General Government (in millions of GEL, cumulative from the beginning of the calendar year) — December 31, 2020 - Healthcare costs related to prevent the COVID-19 spread and treating COVID-19 cases: 351 - Disbursements of foreign-financed project loans1: 1,170 - Receipts from sale of non-financial assets: 150 - VAT refunds: 600 - On-lent amounts from project loan disbursements: 250 - 1 This value excludes project loans that are used to support the budget and/or the healthcare sector, namely, the World Bank’s Fast Track COVID-19 Facility and EIB’s healthcare project. Adjustments will not be made on these loans. - Supporting material for general government financing: - Domestic bank and nonbank financing data: provided by the NBG and Treasury within four weeks after the end of each month. - External project financing and other external borrowing: provided monthly by the Ministry of Finance within two weeks of the end of each month (specifying projects by creditor). - Healthcare spending (per specified decrees) to be provided. - Data provided at actual exchange rates. - Receipts from sales of non-financial and financial assets: monthly within two weeks of the end of each month. - Data on securitized debt sold by the NBG, including securities purchased by nonbanks: monthly within two weeks of the end of each month. - Georgia Revenue Service monthly data (for previous month) by end of each month on: - Number and GEL value of claims for cash refunds submitted by taxpayers, separately for VAT and other taxes. - Number and GEL value of cash refunds paid, separately for VAT and other taxes. - Number and GEL value of cash refunds paid automatically, separately for VAT and other taxes. - Net budget lending - Definition: Net acquisition of financial assets for policy purposes by the general government, consistent with GFSM 2001. - Ceiling on Current Primary Expenditures of the General Government - Definition: Primary current expenditures = expense (GFSM 2001) on a cash basis, minus interest payments. - Supporting material: Expense and net acquisition of non-financial assets data reported within four weeks after the end of the quarter. - Ceiling on Outstanding stock of VAT credit refunds - Supporting material: For period from 16th day of previous month to 15th day of current month, provided by Georgia Revenue Service by end of each month on: - Opening balance in taxpayer accounts (stock) - New tax credits declared by taxpayers - Tax credit balance adjustments by GRS after desk check/audit and by taxpayers - Tax payments to the budget - Tax credits offset against tax liabilities - Tax credit refunds paid in cash - Other flows (residual) - Closing balance in taxpayer accounts (stock) - Closing balance amounts not eligible for a cash refund (stock) - Continuous Performance Criterion on Accumulation of General Government External Debt Arrears - Definition: Debt as set forth in point No. 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 15688-(14/107) adopted on December 5, 2014). External debt defined by residency of the creditor. - External payment arrears: all overdue debt service obligations (payments of principal or interest, considering contractual grace periods) for debt contracted, guaranteed, or assumed by central government, NBG, or any agency acting on behalf of the general government. - Ceiling on new external payments arrears applies continuously; does not apply to arrears arising from external debt being renegotiated where creditor has agreed no payment needed pending negotiations. - Supporting material: Accounting of non-reschedulable external arrears by creditor transmitted monthly within two weeks of the end of each month. - Continuous Indicative Target on Accumulation of General Government Domestic Expenditure Arrears - Definition: Domestic expenditure arrears = non-disputed payment obligations overdue. Arise on any expenditure item. Arrears arise from non-debt liabilities not paid after 60 days of contractual payment date (or after 60 days of receivable if no contractual date). Wage, pension or other entitlement obligations not paid after 30 days from due date are in arrears. - Supporting material: Accounting of new domestic expenditure arrears transmitted within four weeks after the end of each month. - Continuous Ceiling on the New Guarantees Issued by the Public Sector - Definition: Guarantee arises from any explicit legal obligation of the public sector to service debt in event of nonpayment by recipient (payments in cash or in kind). - Supporting material: Ministry of Finance provides information on any new guarantees within 4 weeks after the end of each quarter. - Partnership Fund: Ceilings and Definitions - Ceiling on the Cash Deficit of the Partnership Fund - Definition: Cash deficit = expenditures minus revenues. - Revenues: dividends from assets and investments, interest earnings from loans, fees for services and guarantees, other income from assets. - Expenditures: all current and capital expenditures. Current = compensation of employees, purchase of goods and services, transfers, other payables, domestic and external interest payments. Capital = net acquisition of nonfinancial assets (GFSM 2001). Purchase of financial assets (lending, equity participation) not considered expenditures. - Ceiling on New Net Borrowing by the Partnership Fund - Definition: Net borrowing = contracted debt liabilities minus principal repayments. - Supporting material: Ministry of Finance provides detailed quarterly info on revenue, expenditure, new contracted debt and principal repayments within four weeks of quarter end. - Continuous Ceiling on New Investments by the Partnership Fund - Definition: New investments = gross acquisition of non-financial and financial assets, excluding (i) currency and deposits and (ii) other accounts receivables. Excludes transactions required by contractual obligations established before November 1, 2019. - Supporting material: Quarterly acquisition data within four weeks of quarter end. Notification of preexisting contractual obligation transactions within 10 days of occurrence with documentation. - Net International Reserves (NIR) — Floor on the Net International Reserves of the NBG - Definition: NIR in U.S. dollars = foreign assets of NBG minus sum of foreign liabilities of NBG, including all of Georgia’s liabilities to the IMF. - Foreign assets include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and reserve position in the IMF. - Gross foreign exchange reserves defined as liquid, convertible currency claims on nonresidents, including cash holdings of foreign exchange that are readily available. - Pledged or encumbered assets excluded from foreign assets. - Foreign liabilities include Georgia’s outstanding liabilities to the IMF (face value), Georgia’s SDR allocation, and any other liabilities of the NBG (including foreign currency deposits of financial institutions at the NBG and currency swaps and foreign exchange forward contracts with financial institutions), excluding foreign exchange balances in the government’s account with the NBG. - For program monitoring, stock of foreign assets and liabilities valued at program exchange rates. - Stock of NIR amounted to $1,335 million as of December 31st, 2020 (at program exchange rates). - Definitions for budget support: - Budget support grants = grants received by general government for direct budget support from external donors not related to project financing. - Budget support loans = disbursements of commercial loans and loans from bilateral and multilateral donors for budget support. - Adjustors to NIR floor: - Upward/downward by any excess/shortfall of FX privatization revenue in foreign exchange above/below programmed amounts. - Upward/downward by any excess/shortfall of budget support grants compared to program amounts (Table 3). - Downward by any shortfall of budget support loans compared to program amounts (Table 3). - Upward by sum of total excess of budget support loans compared to program amounts and any negative net Eurobond issuance by the government, if this sum is positive. - Upward by any positive net Eurobond issuance by the government. - Upward/downward by 100 percent for any excess/shortfall related to disbursements of project loans and grants to the treasury single account at the NBG relative to projected amounts (Table 3). - Table 3. Georgia: Projected Balance of Payment Support Financing (Million of U.S. dollars) — December 31, 2020 (Cumulative from January 2020 to end-December 2020) - Projected privatization revenue: 0.0 - Budget support grants from external donors and not related to project financing: 118.6 - Budget support loans, including bilateral and multilateral donors for budget support: 908.1 - Disbursements of project loans and grants: 335.1 - Note: Flows are valued at program exchange rates for the June and December targets. - Supporting material for NIR and foreign financing: - Foreign exchange cash flow table with net international reserves, net foreign financing (balance of payment support loans, cash grants to general government, amortization excluding repayments to the IMF, interest payments on external debt by Ministry of Finance and NBG, and conversions for government imports) provided weekly within three working days following the end of the week. *International Monetary Fund — Technical Memorandum of Understanding (TMU) for the Georgia program (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1geoea2021001.pdf_